Reservation wages and the wage flexibility puzzle

König, Felix, Manning, Alan ORCID: 0000-0002-7884-3580 and Petrongolo, Barbara (2024) Reservation wages and the wage flexibility puzzle. Review of Economics and Statistics. ISSN 0034-6535 (In Press)

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Abstract

Using micro data for the UK and Germany, we provide novel evidence on the cyclical properties of reservation wages and estimate that wages and reservation wages are characterised by moderate and very similar degrees of cyclicality. Several job search models that quantitatively match the cyclicality of wages tend to overpredict the cyclicality in reservation wages. We show that this puzzle can be addressed when reservation wages display backward-looking reference dependence. Model calibrations that allow for reference dependence match the empirically observed cyclicality of wages and reservation wages for plausible value of all other model parameters.

Item Type:	Article
Additional Information:	© 2024
Divisions:	Centre for Economic Performance Economics
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor
JEL classification:	E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation) J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J63 - Turnover; Vacancies; Layoffs J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J64 - Unemployment: Models, Duration, Incidence, and Job Search
Date Deposited:	04 Sep 2024 13:30
Last Modified:	12 Dec 2024 04:27
URI:	http://eprints.lse.ac.uk/id/eprint/125342

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